Academic Blog

​The prevalent ideology in the late 20th century changed from embedded liberalism to neoliberalism. Embedded liberalism is the ideology that in order to manage economic instability, economic markets should be moderated by the political/legal system. Embedded liberalism, prevalent during the post-WWII period, was supported by Keynesian economics. Keynesian economics popularized the idea that governments could stabilize economic markets by managing aggregate demand through state expenditures. However, Keynesian economics lost its popularity in the 1970s when the United States faced stagflation. Keynsesian economics fails to explain stagflation, since government spending cannot manage a situation where you have inflation without economic growth. As a result, during this period, Keynsianism fell as the prevailing ideology and neoliberalism began to rise. Neoliberalism is the idea that government interference is harmful to economies. As such, neoliberalism significantly contrasts with embedded liberal ideology. The rise of neoliberalism has a major impact on current market conditions.

Neoliberalism, the prevailing ideology in the late 20th and early 21st centuries, emerged alongside three other distinct but interrelated phenomena: (1) corporate efforts to dismantle the social contract, (2) emphasis on increasing shareholder value, and (3) the spread of financialization. These phenomena are not distinct to the United States, but have also occurred in other advanced capitalist countries to an extent.

The late 20th century is marked by increased corporate efforts to dismantle the social contract. The social contract, a term first introduced by Hobbes, is the idea that cooperation in society is not coerced, but induced by self-interest. Society is unified through a social contract. Individuals voluntarily give up their power to an authority under the assumption that cooperation will result in social benefits. However, modern corporations have increasingly focused on maximizing capital accumulation at the expense of social benefits. They have politically mobilized to dismantle social welfare policies, minimize corporate taxes and accumulate capital regardless of social benefit. This has resulted in increased inequality and the fall of the American middle class.

The mechanism underlying corporate efforts to dismantle the social contract is economic stagnation and the fall of corporate embedded liberalism as the prevailing ideology. According to Mizruchi (2013), the fall of corporate embedded liberalism is the result of a fracturing of the corporate elite. Due to decreased cohesion of the capitalist class, when the United States faced stagflation, corporations mobilized to pursue their immediate self-interest and dismantle the social contract rather than act in the long-term interest of the capitalist class as a whole (which relies on the continued legitimacy of the social contract). In short, historical conditions (like stagflation and the fracturing of the American corporate elite) created incentives for corporations to politically mobilize and influence pulbic policy to dismantle the social contract and take back social benefits workers achieved after World War II.

Corporate efforts to dismantle the social contract occurred not only in the United States, but in other advanced capitalist countries, like the United Kingdom. During the 1980s, companies in both the United States and the United Kingdom politically mobilized to overcome problems with capital accumulation by lobbying for public policy which dismantles the social contract. As a result, both President Ronald Reagan and Prime Minister Margaret Thatcher pushed forward neoliberal public policy. Just as the late 20th and early 21st centuries in the United States was characterized by tax cuts, increased privatization, and social welfare roll-backs, the United Kingdom was also characterized by similar neoliberal public policy.

Emphasis on increasing shareholder value emerged along with the dismantling of the social contract. They occurred in relation to each other such that emphasis on increasing shareholder value justified corporate dismantling of the social contract. Empahsis on shareholder value was supported by Milton Friedman's shareholder theory. From this perspective, it is the social responsibility of the company to increase profits. Friedman's efforts were so widely embraced, that he received the 1976 Nobel Prize. Friedman's perspectives greatly influenced the neoliberal polices pushed forward by both Reagan and Thatcher.

Change in ideology (from embedded liberalism to neoliberalism) is the primary mechanism underlying increased shareholder value. Like neoliberalism, Friedman's shareholder theory idealizes profits over general social welfare. As such, neoliberal ideology perpetuated Friedman's shareholder theory. As a result of changed ideology, managers have become increasing dependent on shareholder value to maintain their value and status. Since the professional success of managers depends upon increasing shareholder value, managers have used their power to increase shareholder value, regardless of social costs.

Although you see increased emphasis on shareholder value in other advanced capitalist countries, you see it to a lesser extent. Still there is evidence that large British companies have skirted social responsibility in the pursuit of increasing shareholder value. For example, HSBC, a large British financial services company, was caught money laundering and committing financial malfeasance in the pursuit of increasing shareholder value. However, emphasis on shareholder value is not as prevalent in Britian as it is in the United States. For example, whereas shareholder theory is the prevailing form of thought in the United States, the United Kingdom adopted the 2006 Companies Act, which emphasized stakeholder theory over shareholder theory. Stakeholder theory, a thoery prevalent in Europe, is the idea that corporations are responsible to numerous stakeholders, not just shareholders. As such, in Europe, although shareholder value is considered important, corporate social responsibility is considered even more important.

The late 20th and early 21st century was also characterized by increased financialization. Financialization is the influence of finance on the economy. Finance is part of the secondary circuit of capital. The primary circuit of capital is the productive circuit. The production capitalist uses capital to buy the means of production and labor power to create value and surplus value. The surplus value is reinvested, and there is another circuit of capital, continuing the production process. As long as there is surplus value you can feed back into the system, production can continue. However, capitalism doesn't always expand, which is why there is the secondary circuit of capital. The secondary circuit of capital is the credit system. The finance capitalist uses capital to loan money to the production capitalist, under the assumption that the production capitalist will make enough profit to pay off the loan with interest, so the finance capitalist can reinvest and make more profit. Not only are production capitalists involved in the credit market, so are consumers. The rise of financialization can be seen in the expansion of the credit market (by finding new participants and inventing new financial markets) in the late 20th and early 21st centuries.

The rise in financialization occured in relation to the rise of shareholder value. In fact, neoliberalism, the rise of shareholder value and economic stagnation were the primary mechanisms underlying increased financialization. Neoliberal ideology perpetuated the deregulation of financial markets. Whereas previous policy limited the risky financial market to investment banks, neoliberal public policy deregulated and opened up the financial market to non-banks. Increased emphasis on shareholder value put corporate managers in a bind in the 1980s, as they had trouble increasing shareholder value during a period of economic stagnation. To generate profit during a period of decline, corporate managers attempted to expand capital accumulation by developing new markets to expand into. One example is the creation of derivate products. Derivatives are paper contracts that are derived from an underlying real commodity. For example, the futures market for farmers is a derivative used by farmers to hedge their market risk. From the farmer's perspective, they are investing a large amount of money but are not sure of the price of their crop in the future; they want to be guaranteed a particular price. Futures contracts are agreements by investors to pay a set future price for the commodity. If, once the farmer grows their crop, the price of the crop is more than the price agreed in the futures contract, the investor will make a profit. However, the derivative market is risky. Unregulated, reckless derivative trading, facilitated by neoliberalism, resulted in the 2007-2008 economic collapse.

Increased financialization (and its consequences) is not distinct to the United States. It is prevalent in other advanced countries and around the world. For example, derivative markets have spread not only in the United States, but in other countries as well. Just like what occurred in the United States, an under-regulated derivative market rapidly grew in the 1990s in Europe. As a result, the 2007-2008 economic collapse not only affected U.S. companies, but companies in Europe and around the world.

In conclusion, neoliberalism is the primary mechanism underlying three major changes in the late 20th and early 21st centuries: (1) corporate efforts to dismantle the social contract, (2) emphasis on increasing shareholder value, and (3) the spread of financialization. Neoliberalism is not distinct to the United States. Other advanced capitalist countries have also adopted neoliberal ideology, to different extents. As a result, you also see similar changes in other advanced capitalist societies.